Is This the Pin That Bursts the Bubble?

Two weeks ago, in an update to our paid subscribers, I assessed the impact of the pending default of Chinese real estate developer Evergrande.

Over the previous weekend, the company announced that it likely wasn’t going to be able to pay its  bills. (That’s the vendors and suppliers it owed, not to mention the creditors who own its debt.)  Not a pretty picture having some $300 billion or so in debt outstanding.

The market opened that Monday in the proverbial “sea of red.” Headlines were calling it a “Lehman Brothers” event.

My take on it all… the whole thing was pretty much a non-event where the market was concerned. There were a lot of other factors at play.

In addition to weak internals that were signaling some rough times ahead, September is typically the worst month of the year for the stock market. So the action wasn’t significant in my mind.

The market rebounded from an unsettling Monday to close higher on the week.

Last week we saw some more unsettling — though not unexpected — market action.

But where this shake up goes, there is an underlying factor I need to point out…

One of Our 4 Horsemen May be Coming to Town

If you’ve read my series titled “The Four Horsemen of the Coming Stock Market Apocalypse” you may recognize what I’m talking about.

Horsemen number 1… Rising interest rates.

In that report I wrote:

“We are living in the easiest Fed monetary policies in history. A full 22% of all money in circulation has been created in 2020. And the Biden Administration is pumping trillions in additional fiscal stimulus into the economy this year.

All the excess cash adds up to near all time highs in most indices and continuation of the longest bull market in history.

The question is, for how long?”

Near-zero interest rates have been one of the biggest driving forces of the current market rally. With nowhere else to put their money, big funds keep pumping more dollars into stocks regardless of the overall valuation of the market. And this has created — you guessed it — a bubble.

A pool of overpriced assets just waiting for something to pop it.

Rising interest rates are the number one candidate to be the pin that pops the bubble.

Are Rates Rising from the Dead?

On September 20, yields on U.S. Treasuries (notably in the 10-year) began rallying sharply. They took out previous high levels around 1.35% (the level that had held them at bay all during the month of September) and rallied to near 1.55% While it was only about a 27 basis point move (a quarter of one percent) from low to high, it was significant.

The following week, beginning on September 27, the market took a dive…

Now, is this signalling the end of the bubble? Not necessarily.

But the situation definitely bears watching. Because if the upside continues and yields are able to take out longer term highs at around 1.75%, then there is some serious potential for higher rates to be in the near future.

Splashy news events like the Evergrande default may be called out by the media but technically have little impact on the market.

A significant shift in interest rates, on the other hand, is something that could very well burst this bubble.

Keep an eye on the interest rate markets and…

Make the trend your friend,

Bob Byrne
Editor, Streetlight Daily